Analysts expect Paychex to post rise in profit, sales

Paychex Inc. has made a slow but steady recovery since the depths of the recession, but analysts are worried that a still-sluggish economy is inhibiting revenue and earnings as the company prepares to release results from its fiscal third quarter.

The Penfield-based payroll and human resources services company is to release results for the quarter, which ended Feb. 28, after the markets close Wednesday.

Analysts predict earnings per share of 39 cents, up from 37 cents a year ago, Thomson Reuters reports. Analysts expect revenue of $592.6 million for the quarter, a 4.1 percent increase.

In the second quarter, Paychex had revenue of $569.4 million, falling below analyst estimates of $573 million. Net income and diluted earnings per share increased 5 percent to $147.9 million and 41 cents a share.

Martin Mucci, president and CEO, said the company made solid progress during the second quarter, with its payroll services revenue hurt by client disruptions from Hurricane Sandy but still up 1.4 percent. Human resources revenue grew at a double-digit rate, he noted.

Several analysts had downgraded Paychex stock before those quarterly results were reported. Analysts at First Analysis Securities Corp. downgraded shares of Paychex from an overweight rating to an equal weight rating, and Citigroup Inc. analysts downgraded Paychex shares from a neutral rating to a sell.

At the time, analysts said the company was being held back by slower employment growth than expected. An analyst with Credit Suisse wrote that Paychex had a strong business model but limited prospects for growth, "given a lackluster environment for new business formation in the United States."

Some analysts believe the difficulty will continue through the third quarter, but with the outlook brightening as the year goes on.

"Management cited disruptions from Hurricane Sandy as moderate headwinds; however, we believe anemic new business starts continue to be a drag," wrote Vishnu Lekraj, an analyst with Morningstar Inc., in a note to investors. "This negative trend should start to reverse over the remainder of the fiscal year as the economy improves and the firm's revamped sales structure begins to gain momentum."

A key test will come in Wednesday's earnings report as Paychex shows results from its peak selling season, Lekraj said.

Mucci noted after second-quarter results were reported that the company did well in its efforts to sell to small businesses and was well-positioned going into its peak selling season.

A more optimistic assessment of Paychex was released last week. In a report, J.P. Morgan Chase & Co. chief equity strategist Thomas Lee included Paychex among his "Top 15 Picks To Buy Now."